Sony set the date for a showdown in the video-game industry yesterday with the unveiling of a state-of-the-art successor to its market-leading PlayStation console.

The PlayStation 2, which will be introduced in Japan next March 4 and in Europe the following autumn, will take on Sega, Nintendo and possibly Microsoft in a high-stakes battle for control of the lucrative home entertainment industry.

Sony has invested ¥120bn (£666m) in the machine. It is a huge gamble for the Japanese electronics producer but the potential rewards are immense.

Sales of the current PlayStation, which account for 40% of the group's earnings, are expected to hit the £70m mark by the end of the year, and software titles often sell better than chart-topping music CDs.

This market is expected to expand, as the new machine is far more than a game. The PlayStation 2 boasts a 128-bit "Emotion Engine" processor said to be far more powerful than any Pentium and capable of near film-quality graphics, including a realistic depiction of rippling water, heat haze and refracted light.

The console is also equipped to play Digital Video Disc films and download games and music from high speed digital networks. From 2001, Sony will begin using cable to broadcast films and distribute games for the machine, potentially on a pay-per-view or pay-per-play basis.

In the first week alone, Sony expects to sell a million of the new machines, priced at ¥39,800 (£220). The biggest profits, though, are likely to come from software sales. Sony has tied up with many of the world's leading game creators, including Square and Namco, and it expects to launch 84 titles in March and another 128 over the following six months.

Nintendo, its junior competitor, is teaming up with Matsushita to develop a rival console, the Dolphin, which is expected to go on sale before Christmas next year.

The new generation of games consoles, which are cheaper and more powerful than personal computers, is designed to challenge the global domination of Microsoft and Intel.

Microsoft is believed to be taking the threat seriously enough to have began developing its own games console.